Introduction
International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labour, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall CITATION Ree18 l 1033 (Heakal, 2018). A decrease in the cost of labour, on the other hand, would result in you having to pay less for your new shoes.
Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewellery, wine, stocks, currencies, and water. Services are also traded: tourism, banking, consulting and transportation CITATION Ree18 l 1033 (Heakal, 2018). A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country’s current account in the balance of payments.
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International trade not only results in increased efficiency but also allows countries to participate in a global economy, encouraging the opportunity of foreign direct investment (FDI), which is the amount of money that individuals invest into foreign companies and other assets CITATION Rom17 l 1033 (Robinson, 2017). In theory, economies can, therefore, grow more efficiently and can more easily become competitive economic participants.
For the receiving government, FDI is a means by which foreign currency and expertise can enter the country CITATION Rom17 l 1033 (Robinson, 2017). These raise employment levels, and, theoretically, lead to a growth in the gross domestic product. For the investor, FDI offers company expansion and growth, which means higher revenues.
Currency and capital outflow
Import activities increase the outflow of domestic currency in order to pay for the imported goods. If a country imports ratio higher than exports ratio will cause the devaluation of domestic currency. For example, when we demand us products, we must offer our ringgit Malaysia to buy us dollar for payment CITATION Ada16 l 1033 (Adam, 2016). On the other hand, a foreign partnership person will transfer their capital in the form of portfolio investment will cause outflows of interest and dividend. Therefore, some governments have restriction on foreign ownership of its specific industries such as utilities, transportation and communication. This help to avoid foreign investors to have ownership of country wealth and capital outflows
Capital controls play a vital role in the development of a developing economy. The inflow and outflow of foreign capital in and out of an economy is a major aspect of globalization. At the same time, these inflows and outflows significantly affect the appreciation and depreciation of a country’s currency as foreign exchange reserves are directly affected CITATION Ada16 l 1033 (Adam, 2016). Hence, management of such flows is an essential policy measure for the government and central bank. The main purpose of capital controls is to reduce the volatility of currency rates in the economy and provide support and stability to it by shielding it from sharp fluctuations CITATION Ree18 l 1033 (Heakal, 2018). Major disturbances in the flow happen from capital outflows, which lead to a rapid depreciation of the domestic currency.
Bibliography
BIBLIOGRAPHY Heakal, R. (2018, january). What Is International Trade? Retrieved from Investopedia: https://www.investopedia.com/insights/what-is-international-trade/
Robinson, R. (2017, october 3). ENCYCLOPÆDIA BRITANNICA. Retrieved from International trade: https://www.britannica.com/topic/international-trade
Adam. (2016, january 3). https://corporatefinanceinstitute.com/resources/knowledge/economics/capital-controls/. Retrieved from What are Capital Controls?: https://corporatefinanceinstitute.com/resources/knowledge/economics/capital-controls/
